Millions at stake: What does the future hold for carbon?

Having recently hit $60 a unit, carbon forestry is arguably more profitable than sheep and beef. The biggest players are making millions of dollars as the industry expands. But what does the future hold and is carbon farming squeezing out productive land use? Jamie Gray investigates.

Matt Walsh and Bruce Miller have been at the sharp end of business throughout their careers.

Now they head up NZ Carbon Farming with skills honed in the commodities trading rooms of London and the startups of Silicon Valley.

Neither Walsh nor Miller would fit the environmentalist tag, but they would not fit the bill as hard-nosed money men either.

For them, it’s about planting as many trees as they possibly can.

Until now, they have kept a low profile, but in an interview with the Herald, they carefully laid out The Case for Carbon.

A doubling of the carbon price to $60 a unit has certainly focused attention on the sector.

And the business partners are acutely conscious that what they do has prompted controversy in the rural areas.

Miller’s background is in banking and trading.

He spent 12 years in London working for Bankers Trust trading commodities – mainly oil and metals.

He says that experience equipped him well with what can be done to manage risk – skills that would later come in useful.

On return from London, he worked for the then Mighty River Power, now Mercury, trading in electricity and gas.

“That’s when I set up their carbon trading strategy. I guess from the other side of the fence.

“They were obligated under the law to offset their emissions as an energy provider in the early days of the new ETS policy.”

He spent 10 years at Mighty River before forming NZ Carbon Farming with Walsh.

Walsh’s career started with Telstra in New Zealand, which set him off on a 24-year track specialising in startups here and in San Francisco.

In the early days he did some work with Nokia which, at the time, was leading the race in mobile phone technology.

He did a lot of telco work in the US, including for AT&T, and was involved with tech startups in Silicon Valley.

“We started NZ Carbon Farming with the idea that we wanted to make a difference for our children,” Walsh says.

“At the time we had young kids and we wanted to do something that would make a difference for their futures and for all New Zealanders.

“Really, in the beginning it was about growing trees to preserve the planet. That was our concept right from the very start.”

NZ's biggest

NZ Carbon Farming, which has been going for 11 years, is the country’s biggest carbon farmer.

It has 45,000 hectares of land which it manages in conjunction with 6000 parties, many of whom are farmers, and another 45,000ha in its own right.

“We have gone on this journey with a large group of people who have benefited significantly from the value that we have been able to deliver out of carbon,” Walsh says.

The land use capability system used has eight classes. Classes 1 to 4 are classified as arable land, while classes 5 to 8 are deemed to be non-arable.

“We have paid those landowners $94m over the 11 years – much of that from farmland that is marginal – grade six and above – so we are very proud of what we have been able to do for those people.”

NZ Carbon Farming has struck deals with Māori land owners – providing carbon income from marginal land – which Walsh says has gone on to benefit some of the poorest communities in New Zealand.

It has a deal with Ngāti Porou that has been going successfully for eight years, Walsh says.

Planting for carbon sequestration can take different forms

It may sound counter-intuitive, but NZ Carbon’s trees are never harvested.

Unlike some operators, who plant, take the carbon credits and then mill the trees on maturity, NZ Carbon Farming’s trees are left standing for the course of their lives – sometimes up to 100 years.

Walsh explains: “When we started this business, we were very specific that we wanted to do permanent forestry.

“We are not rotational foresters – we are not interested in harvesting trees.

“Along the way, there will be some trees that come out of our forests that can be used in biofuels or in the production process, but that’s very much incidental from our point of view.

“Our priority is pitching those forests as permanent forests.”

Why permanent?

“If you are establishing a rotational forest – that you are cutting every 20 or 30 years – it only generates so much carbon that can be stored before it gets cut down again and replanted.

“Whereas a permanent forest can generate carbon storage to benefit the planet for many decades and so it can have much more of an impact on the climate change problem than if you were to just plant rotational forests,” says Walsh.

Miller says the ultimate goal is to allow the land to go back into indigenous forest, but he says doing that is a managed process as opposed to just letting it happen.

“Some of the trees that are cut allow light, enabling and enhancing growth conditions for the natives, which we will plant from new seed stock, and promote growth through the likes of the pest-free programme as well,” he says.

Walsh says it is an active, carbon-intensive process. “By no means do we let the forest just revert to indigenous – it’s a managed process over a number of decades.”

“We are very intensely involved in selecting the land to make sure that we choose the land that is going to be able to regenerate to indigenous and which is going to enable that to happen.”

NZ Carbon Farming chooses land that has established pockets of indigenous forest inside and around it.

When it comes to planting, selecting the right land is given top priority.

The second priority is pest management in the estate. NZ Carbon Farming spends $1 million on it per year – making it one of the largest pest control programmes in New Zealand.

The third is actively managing the forest to return to its original, indigenous, state.

This involves thinning to create light “wells” in the forest, the planting of indigenous trees in those light wells and then actively managing the forest over the decades to ensure that it gets on the path to transition back to 100 per cent indigenous.

In other words planting and maintaining carbon forest takes skill and labour, which Wash and Miller says offsets job losses that may result from a change in land use.

Carbon's opponents

Carbon has its opponents.

But Walsh and Miller say the idea of wholesale land-use change as it relates to planting trees for carbon is “massively” overstated.

Ironically, both sides of the carbon debate quote from the Beef and Lamb NZ funded research from Baker Ag.

As Walsh sees it, the Baker Ag finds three things.

Over the last five years just 0.2 per cent of New Zealand’s farmland has been planted for carbon. Walsh says even 0.2 per cent could be overstating matters.

But why not plant natives from the outset?

The rate of growth from natives is a fraction of what it is for radiata.

And the cost of planting natives is more than 10 times that of pine.

Wilding pines

The issue of wilding pines is something that is addressed with the neighbours.

“Forests are planted in areas where there is existing farms so any wilding pines that occur on our neighbours’ properties are simply eaten by the stock,” Walsh said.

“Farmers will typically plant part of their farm and again, the wilding pine issues will be naturallydealt with by the stock.”

And he says established native bush will choke out the wilding pine growth quickly.

The Herald last year published an article about a sheep and beef farm in the district, Tuscan Hills, being bought by NZ Carbon Farming for the purpose of planting for carbon.

Walsh says NZ Carbon Farming only plants on grade 6 land and above.

“Where we buy a property like Tuscan Hills, our process is to subdivide off the farm house and the better land and sell it back to the community, so that it can continue to be farmed.

“In the case of Tuscan Hills, that’s exactly what we did.

“This is our model and more than three quarters of the properties that we have built have had this kind of subdivision on them, so that the better quality land can be farmed by the local community.

“Just to be really clear, we don’t support planting on productive farmland – we never have.”

For Miller, the carbon price exceeding $50 a unit shows that the market is working in as much as it provides industry with more incentive to cut emissions, which is what is needed if New Zealand is to meet climate change targets.

Miller says he expects the carbon price to push higher over the next five years.

Burned on carbon

Like all markets, there’s no such thing as a one-way bet and Miller says they “have the scars to prove it”.

When Walsh and Miller became involved in the business, the carbon price was in the high teens, early 20s.

Then the price slumped to below $2 in 2013.

NZ Carbon actively risk manages our units as they roll in.

It sells short, medium and long-term contracts to emitters.

Since its inception, it was selling 10 to 15-year contracts, which helped to offset the impacts of the price slump, but a lot of companies fell by the wayside.

Walsh and Miller say discussions with farmers generally centre on achieving a higher return on marginal land, diversification and legacy.

“These are the things that farmers want to talk to us about, so on the current carbon price, the arguments for planting your marginal land are strong.”

Not all plain sailing

There are of course risks.

“We have learned over the past 11 years that you do face a tough compliance regime in the Emissions Trading Scheme (ETS) – it is a minefield of onerous regulation and fines,” Walsh says.

The compliance standard is very high – with fines of up to $25,000 if they get it wrong.

“And working out what land is eligible for the ETS is also very technical.

“Things like that make it tricky. It’s harder than it looks,” Walsh says.

How it works

NZ Carbon Farming pays for the planting and management. The farmer receives a fixed return per hectare on their land, which is typically higher than what they would get from farming it.

NZX listing?

Walsh and Miller say they field various commercial approaches, including a potential listing on the NZX, but they aren’t interested.

“We reinvest most of the money that we make in the business back into planting more trees,” Walsh says.

“We measure ourselves against how many trees that we will plant this year.

“And how many tonnes of carbon did we store this year?

“These are the things that really drive us in this business.

“We constantly have people approaching wanting investment products or wanting to list or wanting to buy us – we get that a fair bit.

“But at the end of the day we are not doing it for that.

“But if it does not wash its face financially, it can’t be sustainable from an environmental point of view.”

NZ Carbon Farming is a significant operation, building a large conservation estate in New Zealand.

It has also set up shop in Australia and has plans for the United States.

In the last three years it has planted 13 million trees in New Zealand and has stored about 2.4 million tonnes of carbon a year.

As Walsh likes to say, that’s a tonne every 13 seconds.

Planning for the future

The business is predicated on eventually having no further demand for carbon credits at some point in the distant future, with complementary income from things like honey and tourism to carry the cost of managing the forests, Walsh says.

“2050 is less than 30 years away. We think that is likely to be too short a time frame in which to see the significant shifts required in technology and activity to eliminate all emissions worldwide.”

A complex issue

The regulatory environment and the complexity of the Emissions Trading Scheme is a constant issue.

“That part of the market has caused us the most difficulty – trying to do compliance perfectly – because the standard that has been set is extremely high,” Walsh says.

Miller says NZ Carbon Farming needed to be commercial in order to achieve its environmental goals.

“To have scale we need to be commercial so yes, we have environmental goals front of mind but without a commercial model, it is our belief that you can’t achieve those goals,” he says.

Or as Walsh puts it: “For us to be environmentally sustainable, a project must first be economically sustainable, and that’s not necessarily a popular view with environmentalists.

“But from our perspective, that is the reality.”

Has the horse bolted?

Leading farm management academic Keith Woodfood says the implications of the carbon price spike are big.

He said in an interview with RNZ that at $60 a unit, carbon forestry was more profitable than sheep and beef on nearly all classes of land.

“So the question has to be asked, do we really want this to happen?

“Do we understand what is happening?

“And where does our future actually lie?

“We are on the cusp of a huge change and we had better understand what is happening.”

Andy Scott, a spokesman for the pressure group Fifty Shades of Green, says the high carbon price has completely changed the farming dynamic.

“The horse has bolted,” he said.

“Carbon has reached $60 a tonne so that means that someone can earn $2000 per hectare per annum without doing anything apart from planting it,” he said.

“So if someone goes and buys 1000 hectares – which they are doing – that’s $2 million a year. It’s as simple as that.

“With hill country farming – the good farmers are earning $800 a hectare – with costs on top of that – so there is no way that we can sustain farming – it’s a gone burger in the current climate.

“A really top performing person with some good finishing country might do $1000 a hectare but that’s what they call heartland sheep and beef breeding country.

“If this continues, there will be no sheep and beef sector in New Zealand.”

Sam McIvor, chief executive of Beef and Lamb New Zealand, said farmers had been concerned for some time about the scale and speed with which the productive sheep and beef farmland is being converted to pine trees – particularly carbon farming.

McIvor, quoting from Baker Ag research, looked at sales over the last three years.

He said 80,000 hectares were sold into forestry from 2017 to 2020.

That process slowed in the first half of 2020 – probably due to Covid-19.

“The suggestion is that it has picked up again and with a carbon price of $60, the prediction is that it will continue to go upwards,'” he told the Herald.

“We just see unabated demand for this land, driven by speculators wanting to make a buck and also individual carbon emitters buying farms to offset their carbon emissions.”

Beef and Lamb have been calling for the Government to put limits on carbon farming.

At press time, Agriculture Minister Damien O’Connor had no comment when approached by the Herald.

“We do see that there is a place for forestry and the Climate Change Commission report has indicated that this is an important tool in our arsenal for addressing climate change,” McIvor said.

“But it needs to be carefully thought through.

“If we let carbon farming continue unabated, it is going to take out productive sheep and beef land, export earning and jobs out of the rural community and in some cases it’s going to decimate rural communities,” he said.

Then there were the long-term effects of planting.

“We just don’t see conversions coming back out of forestry into farms or other things, so it really is a long-term decision that people make around land use.”

Why the price of carbon keeps going up

Demand by polluters for domestic carbon units has seen the carbon price boom.

At the auction this month, the Government – in an attempt to stop the price from skyrocketing – added an additional 7 million units from its cost containment reserve into the auction system when the price hit $50.

The extra units were easily absorbed, and the market went on to hit $60 a unit – double the price of two years ago.

In theory, the high cost of carbon should encourage polluters to switch to green fuels.

At a unit price of $60, a polluter has permission to release a tonne of carbon dioxide.

The Government’s NZU auction on 1 September set a new benchmark for carbon prices, with the Cost Containment Reserve (CCR).

Broker Forsyth Barr, in its analysis of the carbon price spike, said it was a dramatic step-change.

Carbon prices have an indirect impact on most electricity generators, but there is a direct impact on the wholesale electricity price, Forsyth Barr said.

Every time the Huntly Power Station Rankines or a gas plant is used the cost of carbon is factored into the electricity price offered.

At the current carbon price it is cheaper to build a new wind farm than it is to pay for the carbon released burning coal — let alone factoring in the price of coal itself, Forsyth Barr said in a report.

“Increasing carbon prices makes running thermal generation plant more expensive, encouraging the use of renewable electricity generation. This is how carbon prices reduce carbon emissions,” it said.

The Emissions Trading Scheme quarterly auctions are the Government’s main tool for meeting domestic and international climate change targets.

New Zealand passed multi-partisan climate legislation in late 2019 that set a target of net zero by 2050 for carbon dioxide emissions and set up an independent expert body, the Climate Change Commission, to decide on a path to get there.

Carbon prices around the world are rising as governments get tougher on emitters.

Early this month, the EU carbon price touched an all-time high on the prospect of tighter environmental regulations.

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